Standard Bank leading the way
J– Standard Bank is the leading bank in Africa and presents an enticing opportunity for investors. The company is attractively priced relative to its own history and also in comparison to the broader market.
This is feedback from Tasneem Samodien, a Research Analyst at Private Clients by Old Mutual Wealth, who outlined the reasons behind the bank’s strong performance in 2023 and why this trend may continue.
In its recent 2023 full-year results, Standard Bank reported a strong performance, with headline earnings rising by 27 per cent to R43 billion.
This growth was primarily fuelled by the sustained momentum in the group’s African operations, where headline earnings rose by an impressive 70 per cent in constant currency terms, Samodien explained.
Contributed
Notably, while African regions constitute 27 per cent of Standard Bank’s net asset value, they contributed 42 per cent to the group’s headline earnings.
This is significant given that just a decade ago, African regions accounted for just 12 per cent of headline earnings and were considered relatively immaterial within the broader group.
Standard Bank’s foray into Africa started in 1988 with the acquisition of a 49 per cent interest in Union Bank in Eswatini. The group slowly added to its exposure through acquisitions and organic expansion.
It currently has a presence in 20 sub-Saharan countries and has amassed a significant share of the banking market across the region.
Despite its size, Samodien said that Standard Bank still punches above its weight by ensuring its ventures into Africa have been profitable for shareholders.
In 2023, its return on equity in Africa surpassed its return on equity deployed in SA, offsetting the higher cost of capital outside of its home market.
One advantage of the group’s dominance in Africa is its Global Markets division, which bridges the gap between African businesses and international markets.
Through this business unit, the group assists clients in trading foreign currencies, commodities, fixed-income securities and equities, providing a valuable source of income diversification. Samodien said this value, however, is not reflected in
Standard Bank’s share price, which presents an attractive opportunity for investors.
The negative investment sentiment surrounding banks is attributed to the expectation that interest rates will be cut in the near future.
Linked
Net interest income, the primary driver of a bank’s revenue, is directly linked to interest rates. Therefore, banks benefit from interest rate hikes as their net interest margins expand, while margins contract when rates decline.
The onset of a rate-cutting cycle in SA and selected markets across Africa is expected to be marginally negative for Standard Bank and its peers. Consequently, there has been downward pressure on local banks’ share prices as revenue growth expectations align with heightened expectations of rate cuts.